May 2006

U.S. Industry Bears Brunt of Past Protectionism

May 2006

by Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret)

As even casual observers of the defense industry can attest, the business of producing and delivering weapons systems to the military has radically changed. In the United States, we have seen our industry not only shrink substantially, but also embrace globalization much like the commercial sectors have in recent decades.

Unfortunately, many of the rules that govern defense industry remain stuck in the Cold War. Protectionist laws such as the Berry Amendment are a case in point. Although initially enacted to protect the domestic textile industry during World War II, the revised legislation in place today is proving to have detrimental effects on American contractors and their ability to meet the needs of their military customers.

The 1941 legislation, named after Congressman E.Y. Berry, prohibits the Defense Department from spending any appropriated funds on items made with non-domestic materials. Of particular concern to industry is the requirement that specialty metals used in the components of a weapon system have to be certified as being of U.S. origin. A recent Defense Contract Management Agency directive would withhold payments to contractors who cannot comply with that certification.

Military hardware manufacturers contend that they cannot possibly certify where the metal in each bolt and screw came from. Prime contractors, as it turns out, are not bearing as much of the brunt of this rule as the sub-tier suppliers who provide most of the components used in aircraft, ships and ground vehicles. These subcontractors often buy scrap metal in bulk quantities, so they have no reasonable way to identify where each type of metal came from.

Companies such as Texas Instruments and National Semiconductor recently announced that the specialty metals used in the devices they provide to the Defense Department have foreign-metal content and therefore cannot comply with the Berry rule. “To the best of our knowledge, no other semiconductor manufacturer currently is capable of meeting that standard,” wrote Gerry Fields, vice president of National Semiconductor.

The specialty metals clause has been in place since 1972 — when lawmakers worried about protecting domestic sources of materials for the Vietnam War. But it has only been recently that the Defense Department has been pressured by lawmakers to crack down on contractors who don’t fully meet the certification requirements.

The pro-Berry movement also has been fueled by the titanium industry, which has tenaciously lobbied to keep aircraft manufacturers from buying titanium from foreign suppliers.

Companies such as Boeing have contended that the realities of the marketplace have to be taken into account. A growing demand for commercial airliners, in addition to pressing military orders, makes it necessary for aircraft makers to resort to foreign sources. There are only two major U.S. producers of titanium and, according to industry estimates, they have a two- to three-year backlog in their U.S. orders.

The Berry Amendment is a valid example of an anachronism that served a legitimate cause when it was enacted, but no longer applies to the realities of the global marketplace.

Under the “Buy America” banner, supporters of this amendment call it a patriotic duty to ensure our domestic industry is protected from foreign competition. Clearly, the nation’s industrial policy must take that into account. But it also has to accommodate the needs of our weapons manufacturers that need raw materials and, at times, find that domestic sources are insufficient.

The Defense Department, to be sure, has the right to issue waivers to contractors so they can purchase materials in the international market, but increasingly those waivers are being denied to prevent political backlash.

At this point, much discussion is taking place on this issue in the Defense Department, on Capitol Hill and in corporate boardrooms.

Obviously, there is much at stake in this debate. On the one hand, a number of American firms face the possibility of not getting paid for their work. That, in itself, would not be acceptable.

On the other hand, the Defense Department has to worry about the prospect of not being able to obtain the hardware that the war-fighter needs because suppliers are not able to acquire the raw materials domestically in a timely fashion. That scenario also would be objectionable.

This month, the Defense Department introduced a proposed revision to the Berry Amendment, which would exempt dual-use products that are made both for the military and the civilian markets. If Congress agrees to this proposal, it would mark a step in the right direction, but still would not solve the problem.

We have not yet reached a crisis point, but it’s appropriate to begin raising red flags now. If a reasonable solution is not achieved soon, American firms — those same firms that the Berry Amendment sought to protect — will likely bear huge financial burdens if they are not paid for their products. More importantly, the nation’s military forces could see shortages of critical equipment that the industry cannot deliver because outdated regulations stand in the way.

NDIA will be following this issue closely and will be working in support of effective policies and laws that protect both the industrial base and the war-fighter.